The Inflation Of Macau Essay

1285 words - 6 pages

In the first half of the 1990s when the economy grew at an annual average rate of 6%, inflation rate, measured by the consumer price index, rose faster at an average rate of 7.8%. In the wake of the Asian financial crisis in October 1997, which sent most Asian Pacific countries into recession, hit hard on Macau's economy. Real GDP did not grow in 1997 and declined by an estimated 31/2 percent in 1998. Inflation declined from about 5 percent in 1996 to 31/2 percent in 1997 and further to about 1/4 percent in 1998. In the statistical record of Macau SAR, its first price deflationary year was 1998 and this also marked the beginning of a series of annual deflation. This, together with sharp ...view middle of the document...

In the 1970s, the world economy was in a state of stagflation - a combination of recession and inflation, which was caused by the oil crises. The current state of Macau's economy is the exact opposite, which is a combination of deflation and positive real GDP growth.From the Yearbook of Statistics, we can observe that the Consumer Price Index changed from 101.83 (in 1998) to 93.46 (in 2003).Some environmental factors are concerned for the gradually decrease of CPI:ØThe transformation of economyWhen an industry started to grow, the price was usually higher because of higher cost and more competition. Later, when the economy began adapting that industry, price level would become more stable because the cost and competition were reduced. (Example is the "dot.com" business)ØAsian financial crisisThe turmoil of Asian financial crisis had significant effects on the economy. Most people were tied up by negative assets. As they need large amount of money to pay back the debt, the income used to buy necessities reduced, leading to a decrease in demand. Hence, price level fell.ØDisastersThe outbreak of SARS and bird flu reduced people's expectancy to the future. As a result, they choose to save more for future use (precautionary saving). When saving increases, investment decreases. Then, there will be a fall in price level.In another way, the decrease is reflected by some social and psychological factors:ØThe change of tastePeople change the taste frequently. This is usually hard to be reflected by CPI. When people began to chase for low-price goods, they spend less on high-price goods. Then the ratio of CPI on different goods will change.ØThe advance in technologyBetter technology enhances the production process, as suppliers can produce more goods with a lower cost. When the cost is reduced, supply increases, leading to a drop in price level.Year199819992000200120022003Consumer Price Index101.83101.1299.4997.5294.9493.46The economic effects of inflation (deflation) in Macau are:ØReal incomePeople real income tends to increase during deflation. They can now buy more goods and services with the same amount of money income as before.ØThe cost and standard of livingThe cost of living may increase because people need to pay less for goods services. If their income is kept constant, their standard of living will rise.ØThe choice of wealthLess people will hold the physical goods because they are afraid of the sustained fall in price will continue.ØIncome...

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